Last week we looked at analyzing opportunities as they come your way. This week we’re going to look at risk, the flip side of opportunity. Analyzing risk is similar to analyzing opportunities, though there are some parts that are easier and some that are more annoying.
Risk
So I already said that risk is the other side of the opportunity coin, but what does that mean? A risk is exposure to danger or loss and there’s an entire industry dedicated to risk management. It could be the risk of going full time streaming and depending solely on your business for income. It could be the risk that you suffer some sort of disability that means you can’t work. Heck, risk can mean death, stock market losses, high taxes, or pretty much anything bad that you can imagine. Risk isn’t fun but taking tactical risks can lead to greater rewards.
Much like opportunity, your best bet for managing risk in your life and your business is to have a system in place that you’ve defined beforehand to help you analyze what you’re facing. I’m literally copy pasting these next two sentences from last week because they’re still relevant. The best time to develop that system was yesterday and the next best time is now. Calm, collected you is a much better decision maker than excited you so take the time when things are relaxed to make your future better.
Analyzing Risk
There are only two things you need to consider with risk, so it makes it a little easier to analyze. We’ll use those two things to make a nice grid you can use that should help your decision making.
Frequency
This one’s not hard. How often are you exposed to this risk? If the risk is dying in a parachuting accident presumably the risk is relatively infrequent. If it’s something like getting in a car crash and you’re a driver then the risk presents itself fairly frequently. That’s all you need to know.
Magnitude
How bad is the outcome if it were to come to pass? Are we talking biting your lip and having it hurt or are we talking death? While it sucks to suffer any negative consequence of a risk it’s very, very important to have a realistic idea of how bad the outcome would be. This is often highly specific to your situation. For me, eating seafood is a generally a negative thing. I just don’t like super fishy foods. In the long run though I’d be slightly sadder but alive if I only had fish to eat. However, if I were allergic to seafood then it would be a totally different story. Figure out the magnitude of the risk you face before actually agreeing to take it on.
What You Should DO
I’ve put in an expertly crafted graphic below that tells you how to deal with different scenarios. If the magnitude is low (toe stubbing) you just retain the risk and deal with the consequences as best you can. Yeah, it sucks to stub a toe but are you really going to do all that much to avoid it? The more interesting discussion comes with the high magnitude risks. These are the risks that really, really suck. Again, this is your death and dismemberment or financial ruin territory. If your risk would be frequent and high magnitude you should do your best to avoid it. Basically, this is deciding not to live at the base of an active volcano or deciding not to throw rocks at bee hives when you know you’re allergic to bees. That’s obvious.
The less obvious one is what you should do with high magnitude but low frequency risks. In that case, you should see if you can insure against them. Basically, you pay someone a fee for them to take the risk for you. Their business works since they insure thousands of people and if the frequency is truly low then only a couple will suffer. Therefore, they can still make money with careful pricing and help out those who need it. However, if you’re the one who gets unlucky it would suck to not have someone else bearing that risk. While insurance salesmen have a kind of slimy history there is actually really good reason in getting insurance. Pay the little extra to stop worrying about the risk!
Conclusion
Risk is a fact of life. If you ignore risk it’s still there and it’s going to bite you in the ass even harder because you didn’t do anything to mitigate it. Take the time, put together a system to analyze your risk, and use it as needed. If you’ve got any questions on this topic or others that come to mind leave a comment to let me know!
